Foreclosure Charges Not Taxable as Liquidated Damages Under Service Tax: CESTAT Allows Refund for Sundaram Finance [Read Order]

Sundaram Finance Ltd., appellant- assessee, was engaged in vehicle and property financing, along with services like software solutions, BPO, hire-purchase, and equipment leasing. When customers opted for loan pre-closure or foreclosure, they were charged additional fees as per the agreement.

The department treated these charges as ‘liquidated damages’ and demanded service tax for the periods July 2001-March 2010 and April 2010-March 2011. The assessee paid the tax under protest and challenged the demand. The tribunal allowed the appeals in February 2023, and the appellant received refunds for the amounts paid during those periods.

For the later period (April 2011-June 2017), the refund claim was rejected on the ground that it was not covered under the tribunal’s earlier order. This rejection was upheld by the Commissioner(Appeals), leading to the present appeal.
Read More: Foreclosure Charges Collected by NBFC Not subject to Service Tax: CESTAT Quashes Demand Against Sundaram Finance

The two member bench comprising P.Dinesha (Judicial Member) and Vasa SeshagiriRao (Technical Member) examined the arguments from both sides, reviewed the documents on record, and considered relevant case laws. The main issue was whether the refund denial was legally valid.

It noted that the facts were not in dispute, and a refund had already been granted earlier based on a tribunal order which followed a Larger Bench ruling. That ruling had held that foreclosure charges collected by a Non-Banking Financial Company were Foreclosure Charges Not Taxable as Liquidated Damages Under Service Tax: CESTAT Allows Refund for Sundaram Financenot taxable under "Banking and Financial Services."

Read More:No Service Tax Payable on AmountCollected as Liquidated Damages: CESTAT

In the present case, the department had treated the foreclosure charges as liquidated damages and denied the refund. However, the tribunal held that even if considered liquidated damages, such amounts were not taxable.

It referred to earlierM/s.Sundaram Finance Ltd vs The Commissioner of GST & Central Excise rulings, including the South Eastern Coalfields Ltd. and Neyveli Lignite Corporation Ltd. cases, which clarified that liquidated damages or penalties were not payments for any service and did not attract service tax.

The appellate tribunal concluded that the refund denial had no legal basis and therefore set aside the order and allowed the appeal.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates